Information Technology

Profile: In-Q-Tel

The ‘Q” in its name, while only added to “intelligence” to bring some marketing pizzazz by referencing the gadgets man in the James Bond media franchise, remains apt.

Author: James Mawson

Universities leaders being involved with start-ups and venture capital funds is less rare than it once was, but there are few that combine both jobs.

One who does successfully is Michael Crow, president of Arizona State University (ASU) and non-executive chairman of In-Q-Tel (IQT), a venture capital firm set up to find and source the technologies developed by entrepreneurs that might be relevant to its paymaster, the US government’s intelligence community.

And many of these technologies have come from companies founded with support from universities and grants from other government agencies.

In its annual tax filings, IQT said it was founded in 1999 as a “private, not-for-profit company to help the CIA [Central Intelligence Agency] and broader US intelligence community identify, adapt and deliver cutting-edge technologies that address national security needs. IQT’s strategic investment model … [means,] on average, for every dollar that IQT invests in a company the venture capital [VC] community has invested over $10, helping to deliver crucial new capabilities at lower cost to the government.”

As one of the executives* behind IQT’s formation and who remains closely involved put it: “IQT was originally modeled as a technology VC because technology and entrepreneurship was the area of interest for us.”

The government’s traditional contracting approaches to established systems integrators were deemed lacking in “agility” when it comes to finding and nurturing entrepreneurs and companies which could develop commercial technologies relevant to the intelligence community. This network of agencies now stretches beyond the CIA to include the Defence Intelligence Agency, Department of Homeland Security’s Science and Technology Directorate, National Security Agency, National Geospatial-Intelligence Agency, and others.

By the late 1990s, this need to reach out to entrepreneurs for technology had reached a point requiring an IQT-approach. Government contracts were no longer the primary source of defence technology, especially as part of the national security agenda increasingly involved understanding the security opportunities and threats brought about by the internet and computing power.

Military contracts after the Second World War were critical in providing resources to fund the development of internet, personal computer and information technology. But by the late 1990s, as one source close to IQT’s formation put it, the government went from contracting about 80% of technology it could use for national security to about 20%, with 80% by third-parties. The historical pattern of technology transfer, from federally financed laboratories to the military and eventually to civilian use, had reversed after the ending of the Cold War and the collapse of the Soviet Union.

The government was also looking for ways to tap into private research and development for companies not willing or able to go through its established non-equity funding programmes, such as the US government’s Small Business Innovation Research (SBIR) grants. Analysis by Global University Venturing to end-October of more than 170 portfolio companies back by IQT shows 39 have gained $70.5m in SBIR funding, according to public sources (see table – sheet 1).

While these grants are often overshadowed by the equity investments from venture capital funds, SBIR grants have been often important, especially at a startup’s earliest days when the technology is being developed for commercialisation.

IQT’s need for cutting edge technology means it maintains links with multiple corporations, such as bank Citigroup, and universities, including ASU, MIT, Harvard and University of California.

One corporate venturing head of investments said: “There is a different level of relationship in private–public in this security space and we [and IQT] both approach entrepreneurs with the same needs. We do portfolio swaps as a benefit from dealing with the same currency, for example denial-of-service attacks, so we have a level of expertise for portfolio companies.”

This special relationship in security is shown by how often IQT co-invests in companies alongside corporate venturing units to effectively reverse-engineer commercial development for government use. Analysis by GUV’s sister title, Global Corporate Venturing (GCV), of the syndicates in IQT’s public deals show nearly half (77 of 172) contained corporate venturing units.

For universities, the links are also extensive.

Around the turn of the millennium, ASU formed a partnership between its tech transfer unit, Arizona Technology Enterprises (AZTE), and IQT to help develop a Partnership for Research in Spatial Modelling (Prism). IQT agreed to support the development of Prism’s handwriting recognition and document segmentation technology.

Gilman Louie, then-In-Q-Tel’s president and CEO, said: “ASU’s 3-D handwriting technology offers unique capabilities for recognising handwriting and segmenting documents. In-Q-Tel is very pleased with its partnership with ASU’s Prism. They have made significant progress toward a solution that will not only have broad utility for the intelligence community but potentially attractive commercial applications as well.”

Qynergy, which was founded in 2001 by Paul Shirley for the purpose of developing a beta-voltaic QynCell technology based upon a licensed technology from Sandia National Laboratories and the University of New Mexico.

Decru, a networked storage provider sold for Network Appliance for $272m in 2005 after co-founded four years earlier by Serge Plotkin, an associate professor of computer science at Stanford University who formerly worked on network security for the Israeli military.

Cambrios, which makes transparent electrodes based on silver nanowires to simplify electronics manufacturing processes and was founded in 2002 by Drs Angela Belcher of MIT and Evelyn Hu of the University of California, Santa Barbara.

SpectraFluidics, which uses technology invented by professors and researchers from the mechanical engineering and chemistry departments of the University of California, Santa Barbara, and since IQT’s investment in 2010 has won two US Army development and engineering contracts and a $1.3m contract from the US Department of Homeland Security, Transportation Security Administration (DHS/TSA).

Fetch Technologies, which was founded in 1999 by two faculty members at the University of Southern California Information Sciences Institute to make web data accessible and useful for the enterprise by using customized software agents (and was acquired by Connotate in March 2012).

Geosemble, a 2004 spin-off from the University of Southern California whose GeoXray product automates the process of discovering, geospatially visualizing, monitoring and sharing relevant unstructured information from any source before its acquisition by IQT-backed TerraGo.

Overall, however, university spin-outs seem to have been a minority source of dealflow.

In its latest regulatory filing, IQT said by end-March 2012 it had invested in more than 180 portfolio companies, “many of which have produced technologies that have contributed directly to IC missions.

“Technology delivered by IQT, for example, makes it possible to fuse data from maps, images, text and other sources; visualise information in ways not previously possible; rapidly process vast amounts of information in multiple languages; and identify the critical intelligence faster and more effectively.”

George Tenet, former director of the CIA who was in charge of IQT’s creation, in his book, The Storm: My Years at the CIA, put it more succinctly: “The In-Q-Tel alliance has put the Agency back at the leading edge of technology.”

This was some achievement given skepticism that the US government could effectively fund a VC firm run independently and reap both financial and strategic returns, according to sources working on its launch. A 2001 report for the US Congress and the CIA by consultancy Business Executives for National Security (Bens) called Accelerating the Acquisition and Implementation of New Technologies for Intelligence, Report of the Independent Panel on the Central Intelligence Agency In-Q-Tel Venture found IQT had made a good start.

Lawrence Meador, chairman of the independent, 30-strong panel, wrote in a preface to the Bens report, published by news provider FCW: “I would note for the record that several members of this panel from a variety of industry sectors approached this assessment process with what I would describe as an initial reaction of skepticism and concern about the basic In-Q-Tel business model from a policy, legal and competitive perspective.”

The panel concluded, however, "the In-Q-Tel business model makes sense, and its progress to date is impressive for a two-year-old venture".

Insiders credited IQT’s relative success and longevity to its focus on getting the start-ups’ technology through the In-Q-Tel Interface Center (QIC) and into use by the IC. IQT’s peers, such as DaVenci, OnPoint and Chart Venture Partners, have struggled to maintain the levels of funding IQT has collected.

The decision to set up IQT as an independent firm with staff initially sharing part of any profits – called carried interest – through an In-Q-Tel Employee Fund attracted talented people, such as its first chief executive, Gilman Louie, a former video-game entrepreneur who headed Hasbro Interactive's Games.com group, able to find and back entrepreneurial companies. But the timing of its launch was also opportune as the intelligence community received a shock with the 11 September 2001 Al Qaeda attacks on the US mainland and subsequently received greater attention and resources to both prevent another such assault and guide the invasions of Afghanistan and Iraq.

For example, IQT had in 2001 invested about $2m in the series A round of mapping service Keyhole, co-founded by ex-foreign affairs operative John Hanke and named after the KH reconnaissance satellites, the original satellite military reconnaissance system.

Keyhole proved invaluable tracking missiles in Iraq and was in 2004 acquired by US-listed search engine provider Google to form part of its Google Earth service. IQT received shares in Google as part of the sale and later reportedly sold 5,636 of them after Google’s flotation in 2005 reaping more than $2.2m.

IQT also invested in US-based data analytics firm Palantir’s A round (see case study) after working with its founders to help their form company, online money exchange PayPal, fight off Russian fraudsters, according to co-investors and IQT’s staff.

However, Louie’s departure in 2006 to set up a VC firm, Alsop Louie, with a former journalist led to two short-term CEOs, Amit Yoran and Scott Yancey, before its incumbent, Chris Darby, joined. Regulatory filings show Darby’s contract has been renewed until January 2016 after he settled the organisation and helped its evolution to what one insider called a more “mature” organisation.

David Cowan, partner at VC firm Bessemer Venture Partners, the start-up investment group founded by steel magnate Henry Phipps in 1911, at the time of Darby’s appointment told news provider SiliconBeat: “We at Bessemer were invested in Sarvega, and so we saw him in action. Through strong recruiting, good strategic moves, and effective business development, Darby turned the company around and saved our investment.”

But the effect on IQT as an organisation of a period of management succession allowed what insiders called “political factors” to force substantial changes in its approach and operation. The Employee Incentive Plan (EIP) giving staff carried interest in return for investing 10% of their salary in a fund was closed in 2007, according to its regulatory filing.

In effect, there was concern that IQT was too good at doing deals – its regulatory filing for 2005 reported by newswire Bloomberg showed IQT sold for $12m investments that had cost it $1.96m.

As well as closing its EIP, IQT also moved towards an approach of offering more cash for companies’ technology development or conversion to IC needs rather than taking equity and following on in deals. One co-investor alongside IQT in multiple deals said it has taken years for the organisation to recover its cultural connection to entrepreneurs and reengage with them through a series of hires, including both George Hoyem and Peter Kuper in 2010.

IQT’s focus on what it calls paying for work programs and non-recurring engineering and sometimes receiving warrants in return rather than necessarily investing directly for equity means it acts as a conduit for start-ups’ technology to be seen and become ready for use by the IC – its primary purpose – without necessarily diluting other investors’ equity.

As one outside analyst noted, VC’s now “love them because if you pass IQT diligence they can safely assume that the technology/product has value and is technically sound”.

But while dozens of VCs have done multiple deals in IQT-backed companies, (see table – sheet 2) its reputation can be mixed for some. One VC, who discovered IQT had backed database company Palantir (see case study, a version first published in GCV) only while conducting due diligence on it as a potential investment, said: “I’ve not bumped into IQT much despite having done 50 deals from Stanford as they are not needed and if all else is equal we’d rather not with IQT as government backing a negative not a positive because they have different incentives and a pain in the butt.”

A co-investor said by IQT now trying to avoid diluting outside investors on deals meant the government was effectively underpinning the broader venture industry. The analyst concurred that its data showed “security plays are predictably acquired by bigger players for nice multiple,” with IQT-backed ArcSight acquired by Hewlett-Packard for $1.5bn last year after its initial public offering in 2008 and IBM buying Initiate in 2010.

In turn, by accessing venture capital-backed technologies, IQT said in its regulatory filing it had “leveraged more than $3.9bn in private-sector funds to support technology for the CIA and the IC”.

Effectively, therefore, IQT has evolved to a more sophisticated open innovation programme with venture capital investments of up to $3m as just one tool.

While IQT has an estimated nine investment partners reporting to managing partner Steve Bowsher, it had 92 employees in total in 2011, according to its regulatory filing for 2011.

Looked at another way, IQT’s public deals from its website to end-October 2013 showed it had done an 11 new deals in that calendar year, primarily in North America, while previous years were similarly productive (18 in 2012, 13 in 2011, 20 in 2010, 14 in 2009, 15 in 2008, 11 in 2007, 13 in 2006 and 11 in 2005). At an estimated average of $2m per deal and with few follow-on investments made, the bulk of IQT’s annual budget seem to go in other areas even if the portfolio holds multiple companies valued at more than $1bn, such as Palantir, FireEye, Pure Storage and MongoDB, and nearly 70 reported exits over the past 15 years. IQT’s latest form 990 filing scanned in February 2013 for the year ending 31 March 2012 showed a broader group of “program-related investments” of $59.7m. And, over the five-year period to 2011, IQT raised $282.8m in grants and contributions from the IC, mainly through so-called “black budgets” outside of public scrutiny.

However, IQT has actively examined the ethics of the technologies it can help develop through its portfolio, commissioning noted academic Patrick Lin to review the applications for drones, or unmanned aircraft. It has also been active to make sure the technologies stay available even if a startup is struggling.

In December 2003, news provider Institutional Investor gave an example of US­-based software company Graviton that ran into financial trouble earlier that year and laid off its engineering team when its wireless sensor system for detecting chemical and radiological exposures was only two-thirds complete. In-Q-Tel helped arrange a transfer of Graviton's technology to a new company, Soflinx, which rehired the engineers.

More recently, Geosemble, a 2004 spin-off from the University of Southern California (USC) whose GeoXray product automates the process of discovering, geospatially visualizing, monitoring and sharing relevant unstructured information from any source, was acquired by IQT portfolio company TerraGo in July 2012. Geosemble had been a partially-owned subsidary of IQT-backed Fetch Technologies, a data services company that also grew out of collaborations between USC researchers and the government.

Under Darby, IQT has added an open source “laboratory”, called Lab41, on the opposite side of the hallway to its investment team.

Under IQT’s chief scientist, Bob Gleichauf, Lab41 creates “challenges” on specific data problems, particularly around flash memory storage technology applications, experts involved in projects said, and allows the IC to meet and share its technology needs and then work on creative ways to solve them. The “four” in its name reflects what it said are the four communities – government, academia, industry and IQT. A rotating cast of people work in an unclassified environment at Lab41 for three to 12 months to bring a proof-of-concept out to meet the specific challenge with the technical findings and code available for open source publication.

With faster, on-demand flash data storage, allied to the continued exponential rate of computing power, brings “disruptive” changes to analytics, such as you decide early on what types of analysis jobs are likely to yield results.

Overall, IQT divides its “focus areas” into information and communication technology, such as advanced analytics, cloud and infrastructure, digital identity, tools for field missions and mobility, and physical and biological, including DNA fingerprinting, genome analysis, energy harvesting and batteries, lasers and threat detection.

The ‘Q” in its name, while only added to “intelligence” to bring some marketing pizzazz by referencing the gadgets man in the James Bond media franchise, remains apt. IQT’s portfolio companies develop tools suitable for a spy book, including Sonitus Medical, which told news provider NPR in 2012 it had received IQT funding to turn its hearing aid into a two-way radio that allows users to attach the device to their teeth rather than their ear to hear sound.

*IQT declined to comment on-record for this article due to our global audience but fact-checked the data and its staff agreed to talk on background. Concerns about publicly discussing IQT meant all other sources wanted to remain on background, Crow was unavailable after his office was contacted.